Out-Law News 3 min. read

Germany plans to block ISDS clause in transatlantic trade deal

Germany has dealt a blow to free trade agreement negotiations between the European Union and the US by announcing that it will push for an investor-to-state dispute settlement (ISDS) mechanism to be excluded from the deal.

The German government has told EU officials that it will try to block the inclusion of an ISDS clause in the proposed Transatlantic Trade and Investment Partnership (TTIP), according to the Financial Times. The move comes as Europe prepares to launch a 90-day public consultation on the ISDS issue, following concerns about its inclusion.

An ISDS clause is an arbitration mechanism which would allow private investors to sue governments if they believed that local laws were threatening their investments. The European Commission and the US want to include an ISDS in the proposed free trade agreement they began negotiating last year.

The Commission believes that an ISDS would protect EU companies investing in the US following a trade agreement. The proposal has won backing from businesses but has faced opposition from consumer and environmental groups who claim it could allow investors to challenge broader government policies - such as the ban on fracking currently in place in France. Politicians in France and the UK have also voiced concerns.

In response, the Commission suspended negotiations on the ISDS in January this year and announced it would hold a 90 day public consultation on the issue. Negotiations on all other aspects of the proposed trade agreement continued.

EU and US officials have just concluded their fourth round of TTIP talks in Brussels, and now Germany too has made its opposition to the ISDS public. Junior economy minister Brigitte Zypries told the German parliament that Berlin was determined to exclude arbitration rights from any trans-Atlantic trade deal.

"From the perspective of the [German] federal government, US investors in the EU have sufficient legal protection in the national courts," she said, according to the Financial Times.

Germany had until that point backed the inclusion of the ISDS in the proposed trade deal, but according to the Financial Times Berlin has faced growing scepticism from the German public about the trade deal and the ISDS in recent months. At a press conference at the end of the fourth round of TTIP negotiations, Ignacio Garcia Bercero, the EU's chief negotiator, declined to comment on Germany's opposition, but highlighted that member states, including Germany, had previously approved the EU's original mandate to negotiate a trans-Atlantic trade deal, including an ISDS mechanism. He said: "We are working on the basis of the mandate that has been given to us," the Financial Times reported.

ISDS provisions have been common in trade agreements since the 1960s, and in some cases have offered protection for investors who have faced perceived injustice at the hands of governments of countries where they have overseas investments. Concerns from consumers and environmentalists focus mainly around the use of ISDS to challenge government or regulatory policies.

The European Commission has said that an ISDS in an EU-US trade agreement would be designed to protect EU companies investing in the US. The Commission said that EU member states already have some 1,400 such agreements in place with countries outside the EU, including the US, and that an ISDS for the TTIP would aim to "retain the value of the current system for protecting international investors" but also aim to "make these rules clearer, more transparent and impartial than they are today." According to the Commission, European companies were behind 50% of investment cases launched in 2012.

The European Commission believes a trans-Atlantic trade agreement could boost the EU economy by €120 billion – or $162 billion, equivalent to 0.5% of GDP, and that the US economy could benefit by €95 billion, or 0.4% of GDP, according to the BBC.

But the business community has broadly backed the inclusion of the ISDS. A letter to the Financial Times signed by Peter M Robinson, chief executive of the United States Council for International Business, and other business leaders, said: "More than anything we need an ISDS agreement as part of TTIP. We are two major and equal economic partners, who share the same democratic and economic values. We have a unique possibility of making a modern ISDS agreement, which can balance the legitimate needs of governments to regulate public priorities with the legitimate needs of businesses to have reasonable and predictable protection of investments. Such an agreement could become the template for future investment agreements with our other major trading partners in Asia, South America and Africa, where ISDS agreements are an essential safeguard for investors against arbitrary politics."

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